Spain Faces Further Ratings Cut, Moody's Warns

Regional governments' debt, beyond central government's control, spurs problems

Moody's warned Friday that it might further reduce Spain's rating, currently at Aa2, citing the country's regional governments' inability to get their debt loads under control. The central government's austerity program will fail to reduce the nation's debts if regional governments cannot keep up.

Reuters reported that the ratings agency was concerned that regional governments would miss their deficit reduction target by as much as 0.75% of GDP. That would get in the way of the central government's ability to make its austerity program meet its own goals.

In a release, Moody's said, "Regional governments' finances may prove difficult to control due to structural spending pressures, particularly in the health

care sector." Its assessment is an indication that concerns over contagion throughout the euro zone have not abated in the wake of a second rescue package for Greece. Spanish bond yields rose and are now at 6.11%; 7% is considered unsustainable.

While the Spanish Treasury disputed Moody's assessment, saying in the report, "Moody's assumes that the current high yields that have been generated by the resolutions around the Greek crisis will become a permanent burden on non-AAA sovereign funding costs," Moody's did also say that a ratings cut for Spain would likely be limited to a single notch.

Giada Giani, analyst at the U.S.'s Citi, was quoted saying, "The trigger is that the [Greek] deal last week has not really rebuilt confidence across the euro zone so Spain is still on their radar screens with costs rising."

Moody's is also concerned about the ability of the European Financial Stability Facility (EFSF) to respond to further turmoil in the euro zone's debt crisis despite the Greek rescue package.

It commented in that regard, "The package has not relieved market concerns over the position of such sovereigns because (i) it sets a precedent for private sector participation in future sovereign debt restructurings in the euro area, and (ii) while an expansion of powers has been proposed for the EFSF, it is not clear when the powers will be implemented."

Also in line for possible downgrades by the agency are five of Spain's banks, its bank restructuring fund FROB and seven regional debt ratings. It has already downgraded six Spanish regions: Castilla-La Mancha, Murcia, Valencia, Catalonia, Andalusia and Castilla y Leon.

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